Four policies to shift the needle to net-zero emissions

The EU's ambitious goals are not even close to being met, and the main European climate policy tool, the carbon pricing mechanism known as the EU-ETS, is not driving sufficient change. [Michael/Flickr]

In order to achieve the EU’s goal of net-zero carbon emissions by 2050, bolder strategies are needed to drive sufficient change, writes Måns Nilsson.

Måns Nilsson is the executive director of the Stockholm Environment Institute. This opinion article is based on a panel intervention delivered at the annual McKinsey Global Sustainability Summit.

Grassroots demonstrations, extreme weather conditions and the IPCC special report on 1.5°C have contributed to growing political momentum across Europe for net-zero greenhouse gas emissions.

But such ambitious goals are not even close to being met, and the main European climate policy tool, the carbon pricing mechanism known as the EU-ETS, is not driving sufficient change.

Much of the policy debate has become a form of displacement activity revolving around individual behavior and morality. This is a dead end. We need instead bold policies that mobilise and scale solutions to rapidly decarbonise economic sectors. The EU’s Strategic Agenda must enable Member States to shift the needle to net zero.

What policy tools are available for the transition to a net zero emissions economy? The carbon price under the EU-ETS has recently climbed from a dismal 4-5 Euros per tonne to a more reasonable 25-30 Euros per tonne. But at this rate, it is still not able to drive change at the scale needed.

The decline in coal-fired power production in Europe represents almost the entirety of greenhouse gas emission reductions (falling by 9% in 2018, compared to 2017). In contrast, industrial emissions have remained flat since 2012.

The free allocation to industrial sectors has not incentivised reductions in emissions, and 90% of industrial emissions are emitted without any cost to the companies. Even with the revised EU-ETS, there is too little market incentive.

Stretching across Europe, a “carbon neutrality coalition” of EU member states has emerged, including Portugal, Spain, France, Netherlands, Belgium, Luxembourg, Denmark, Sweden, and Latvia. These countries are pushing for a legal framework at the EU level for net zero emissions but they have yet to convince Germany, let alone the coal-fired central and eastern European countries.

The leadership of Germany on scaling solar power through their national policy is now being counteracted by their continuing dependence on coal power and a conservative automotive industry. And without Germany, not much happens in the EU.

Turning the tide on climate policy

Studies have shown that decarbonising industries is possible with new solutions available across industrial sectors. For example, a recent study by Material Economics shows that it is possible to reduce emissions from industry to net zero by 2050 at less than 1% added cost to consumers.

But decarbonisation of industry requires large capital investments, which introduces new costs and risks to individual companies. Moving to a zero emissions strategy will mean investments that for many companies amounts to a “bet the company” moment. This fact warrants policy intervention beyond a generic price signal at €30. To achieve net zero, the future of climate policy action in Europe will be geared at the national level.

What countries need is a new industrial policy framework which recognises the importance of systems solutions across sectors, and leverages the links between the public and the private. For example, fossil-free steel production, using hydrogen instead of coal in the production process, depends on a power system with cheap and abundant renewable electricity supply and would benefit from progress on other sectors’ uses of hydrogen, such in fuel cells for transport sectors. Such industrial transitions cannot be developed by the steel industry, or the private sector, alone.

In this new industrial policy, the state becomes an active member of the innovation system, exploring and taking risks as opposed to merely fixing market failures. As Mariana Mazzucato points out, the state can be, and indeed has been over the decades, a key actor in innovation systems.

This represents a paradigm shift. In the market paradigm of the last three decades, there is ingrained fear of states being unproductive and captured by political interest. In mainstream economic theory, the value that the state provides is mainly to solve market failures and provide infrastructure or security. The perception that it is inefficient and undesirable to interfere with or create new markets is a barrier, and many times, attempts at public action have been stopped due to presumed conflicts with EU internal market rules. But the climate challenge calls for a new paradigm where public actors are drivers of innovation together with the private sector.

Four policy areas to drive the net-zero transition

To drive innovations and solutions for a net-zero economy, four policy areas merit extra attention over the coming years:

Permitting: states need to establish frameworks for permits and licenses to operate to ensure that all new major investments in, for example, industrial installations, commercial buildings, housing, and transport infrastructure are compatible with honoring the Paris Agreement. Permitting processes for climate-smart investments need to be simplified so that installations can be sped up. Today, the administrative time required to plan and install a transmission line to integrate renewable energy into the electricity distribution network, or connect new industrial-scale demand, takes up to a decade or more. Such time frames are not compatible with the urgency in reducing emissions.

Financing: states can play a key role in taking on a part of the risk of the net-zero transition, which is currently hindering companies from making the leap. States need to make significant public funding available for investment, in the form of loans and equity. Other options are private-public partnerships with long term contracts or concessions providing lower market and policy risks for private investors.

Niche markets: states need to create markets for zero-emissions solutions and innovations, in particular through the instrument of public procurement. This both provides protected space for new solutions to develop and sends a strong signal – decarbonised products and services is the future.

Public infrastructure: states need to accelerate capital investment in the critical low-carbon infrastructure that is needed for moving to net zero emissions, and borrow money if necessary. This includes power grid and renewable power supply and integration, as well as more novel solutions for hydrogen supply chains, electrification of roads, charging infrastructure, and electrified railways.

Lofty words and emergency declarations will not take us forward – only ambitious public policy and courageous governmental action will be able to shift the needle to a net zero pathway.

EURACTIV's editorial content is independent from the views of our sponsors.

Media is a pillar of democracy – as long as it can function properly. Now more than ever we need unbiased, expert information on how and why the European Union functions. This information should not be behind a paywall, and we remain committed to providing our content for free.

We know our readers value our reporting. We know journalism that covers the EU in a clear, unbiased way is critical to the future of the European Union. And we know your support is critical for ensuring this independent and free journalism.

Don’t take the media sector for granted. It was already fragile before the coronavirus pandemic. And as people can’t meet, media companies have lost a major source of revenue: events. EURACTIV is supported by a mix of revenue streams including sponsorships, online advertising, EU-funded projects, and policy debates. All of these sources of revenue are impacted by the current crisis.

While media struggles, disinformation thrives. We are already seeing fearmongering, fake news about the EU response, and increased threats to freedom of the press.

For more than two decades we have provided free, independent, multilingual reporting on the European Union. We continue to believe in Europe, and we hope you do too.

Your financial support at this critical time will allow our network of newsrooms across Europe to continue their work when Europe needs it most.

Advertisement

Comments

2 responses to “Four policies to shift the needle to net-zero emissions”

There is much to agree with in this piece. & for once financing is mentioned – would have been nice if there were numbers – but I guess you can’t have everything.

However, the big problem is the role of the state in financing the energy transition & specifically the Lisbon Treaty and the 3%/60% limits. Thus do we enter GND territory, Green QE territory and European Central Bundesbank territory also known as Inflation R Us.

The EU as the writer notes, needs an industrial strategy backed up by Green QE – which can be done by the EIB issuing bonds that are bought by the ECB. In the case of steel and its move to a hydrogen/direct reduction process – numbers in the range Euro10 – 20 billion have been mooted – the EIB needs to step up to the plate and fund the projects needed. Ditto the oh so many other projects both with respect to renewables, transport and energy efficiency.

However, at the time of writing, the ECB gnomes of Frankfurt are sitting on their hands and the only thing you hear is the word “inflation” – whilst in chourus the Commission gibbers on about private individuals and companies finding all the money.

All very valid points. If we look at the cost of integrating renewable electricity, we can see that this is the main stumbling block today – electricity infrastructure is ten times more expensive than gas pipelines, and a further factor of ten higher if we compare the cost of HVDC with upgrading existing pipelines. [d1rkab7tlqy5f1 .cloudfront .net/Websections/Energy_Initiative/Technical%20Report%20Hydrogen%20-%20the%20key%20to%20the%20energy%20transition.pdf].

So rather than embark on a huge expansion of HVDC infrastructure, and combined with the necessity for hydrogen for industries such as steel and long-distance transport (and seasonal heating in many countries) – looking at how to reduce electricity infrastructure cost must become a priority.

The least expensive option that successfully accommodates the practical value of gas over electricity (for transporting at volume and for storage), is to add the electricity infrastructure cost to the renewable electricity LCOE in order to get a more accurate evaluation of the price paid by the consumer. Adding this cost, and comparing it to gas pipelines, its easy to see that not only is hydrogen more practical – it is a lot cheaper.

In this way, the cost of producing electricity (which is likely to fall to €40/MWh by 2030 for floating offshore wind, according to both Equinor and WindEurope, and indeed is already €40/MWh for onshore wind and solar) should then be reduced for hydrogen production to account for the very high comparative HVDC cost.

Below is a methodology for producing both electricity and hydrogen from a renewable energy source with a capacity factor of 50% (offshore wind is 50% today and is likely to increase to 60% and above further offshore), a cost of €40/MWh, and while adding the cost of curtailment (which already occurs in a number of regions) to the electricity price to more accurately reflect the cost of infrastructure.

The resulting hydrogen cost is the same as the natural gas import price in 2018 (€1/kg or €9/mmbtu), and considering the economic cost of domestic gas production could be developed with a higher electricity cost, and balanced via some method of subsidisation (to reflect the offset of imports).

1) The electricity cost is €40/MWh and increased to €52/MWh to reflect HVDC infrastructure costs. 40% of the RES output is fed to the grid.
2) The cost of electricity provided for electrolysis is reduced by directing 60% of this RES output to electrolysers at half the peak rate cost of electricity (€20/MWh – or 30% at zero cost (curtailed) and 30% at peak rate).
3) The cost of the electrolyser must be factored in, which is the utilisation rate of the electrolyser multiplied by hours per year over 20 years. This is equates to 50% CF x 60%; so a 30% utilisation rate.
4) The cost of conversion must also be added.

So, adding these figures together we can conclude that hydrogen can easily be produced for the same cost as natural gas. Reducing the capital cost of the electrolyser and reducing taxes and other burdens on electrolyser operators speeds up this process; and indeed opportunities to generate hydrogen using curtailed electricity exist in many regions already. To be competitive with an average natural gas import price, €40/MWh renewable electricity is required.

Efforts should be made today to ready the gas network for hydrogen, and to modify regulations for electrolyser operators so that electrolysis can be implemented at scale (100MW and above).

Contribute to our reporting

The need for fast, accurate and balanced information is always important. We value EURACTIV's good, independent journalism and support this initiative

Mella Frewen, Director General of FoodDrinkEurope

EURACTIV plays a vital role in bringing Europe closer to its citizens. EURACTIV has long recognised that the story of Europe has to be told across the continent, and not just in Brussels. We need to support a truly European and informed debate.